Tuesday, January 5, 2016

Every year one
of my most-read posts is my annotated overview of the year in VIX and
volatility. Now that I have been doing
this for the past eight years, the aggregated view of volatility from 2008 to
the present makes for a fascinating concise history not just of volatility, but
more broadly of the financial markets and of economic activity in general.

The graphic
below captures most of the highlights from 2015 and from a volatility
perspective, it was a year for the record books. During August we saw the largest one-week VIX spike(+113%) that resulted from unprecedented back-to-back
days of VIX spikes of more than 45%! The
cumulative jump in the VIX pushed the VIX to a high of 53.29 – the only time outside of the
2008-09 financial crisis since the launch of the VIX in 1993 that the VIX has topped 50.

[source(s): VIX and More]

While most
investors pointed to China
as the proximate cause of the record VIX spike(s), a VIX and More fear poll
one week after the big VIX spike also highlighted “market structural integrity
(HFT, flash crash, exchange issues, etc.)” as almost on par with China
concerns, with “market technical factors (breach of support, end of trend,
etc.)” not that far behind.

The balance of
the year saw a wide variety of events that moved the markets, including the Fed’s
first rate hike in nine years; crude oil plummeting to $34/bbl.; shock waves in
the high-yield bond market due to low oil prices; chilling terrorist attacks in
Paris and in California; Puerto Rico announcing it will default on some of its
debt; turmoil in the currency markets when the Swiss National Bank ended the
peg of the Swiss franc to the euro; a dramatic boom-bust cycle in Chinese
A-shares – and a flurry of ineffective interventions on the part of the Chinese
government to restore stability; a proxy war between Saudi Arabia and Iran in
Yemen; and the European Central Bank committing to $1.2 trillion of
quantitative easing.

Finally, since
2011, I have been maintaining a proprietary Macro
Risk Index that measures volatility and risk across a broad range of asset
classes, including U.S. equities, foreign equities, commodities, currencies and
bonds. In 2015, the Macro Risk Index was
consistently higher than it has been during any year since the 2011 inception.

Sunday, January 3, 2016

Just one month
ago, in The
Current VIX ETP Landscape, I plotted all twenty-four VIX
exchange-traded products with respect to leverage and maturity, using
leverage on the Y-axis and maturity on the X-axis. I also included a half dozen VIX strategy
ETPs that have no easily discernable point on the leverage-maturity grid. Depending on how finely you wish to split
hairs, these twenty-four ETPs cover approximately seventeen unique ways to trade
volatility long and short, across various maturities and according to a wide
variety of strategic approaches.

The big story is
that in 2015, not one of those VIX ETPs was profitable. In fact, the mean VIX ETP lost over 21% for
the year. This means that in those
instances where there are long and inverse pairs – notably VXX and XIV as well as VXZ and ZIV – both the long
and short version of the same volatility trading idea lost money.

This all
happened in a year in which the VIX fell a mere 5.2% from the beginning to the
end of the year. While contango was a
factor during the course of the year, contango affecting the front month and
second month VIX
futures averaged a relatively mild 4.3% per month during the year, while
contango between the fourth month and seventh month was slightly above average
at 1.6% per month.

The biggest culprit affecting the declines were the huge moves in volatility, with three one-day VIX spikes
of greater than 30% occurring in the space of two months. The large volatility spikes had a considerable
impact on end-of-day rebalancing, leading to volatility compounding price decay.

One last
technical note, with respect to the AccuSharesVXUP and VXDN products, I
have yet to see AccuShares or anyone else attempt to calculate the performance
of these products for 2015. Given the
chaos created by regular, special and corrective distributions, in addition to reverse
splits and stock dividends, calculating performance for these two ETPs is not a
project I have the inclination to tackle right now. That being said, until I see the
calculations, I cannot be 100% sure that VXUP had a losing year in 2015. Consequently, in the event that VXUP did post
a gain, this would be a good time for AccuShares to post some performance data
and claim at least one public relations victory in this space.

To the broader
audience, if you happen to be sitting on an idea for a VIX or volatility-based ETP that would have
been a winner in 2015, this is an interesting time to consider moving forward
with that idea.

Looking ahead, I
will have a lot more to say about VIX ETP strategies, VIX ETP performance and
related subject going forward.

Saturday, January 2, 2016

About a month
ago, when Steve
Sears and Barron’s asked if I would
be interested in writing the first The
Striking Price of 2016 and share my perspective on what to expect in terms
of volatility for 2016, I jumped at the chance.
I quickly made a list of more than two dozen reasons why I felt
volatility is likely to rise in 2016 relative to 2015 levels and began to
outline the case for why investors should be cautious about the financial
markets in 2016.

Since then,
every pundit has unveiled their 2016 crystal ball and almost without exception,
the consensus is for a significant rise in volatility in the coming year. While I certainly understand the rationale
behind these calls for an increase in volatility in 2016, I can add little
value to the dialogue by rubber-stamping the consensus opinion. In fact, I am probably better off just
pointing you to last week’s The Striking Price column, where former colleague
Jared Woodard channels some of the more compelling of my two dozen plus higher
volatility ideas in Prepare
for Rising Volatility in 2016.

So, given that I
hate overcrowded consensus trades, strongly believe that volatility is
extremely hard to predict and am intimately familiar with data that shows
market participants have a habit of overestimating future volatility in stocks,
I decided that today’s Barron’s column should be The
Case Against High Stock-Market Volatility in 2016.

Today’s column
draws on a good deal of research and analysis I have present here in the past
and also touches upon themes from some previous Barron’s columns.

Purpose of this Blog

The intent of this blog is to educate, inform and entertain readers, while also serving as an archived learning laboratory of sorts as I try to sharpen my thinking in areas such as volatility, market sentiment, and technical analysis. I also enjoy charging off on tangents and hope that readers may find some illumination or at least amusement in these forays.

Reviews of VIX and More

About Me

Chief Investment Officer at Luby Asset Management LLC in Tiburon, California. Previously worked as a full-time trader/investor and also a business strategy consultant. Education includes a BA from Stanford and an MBA from Carnegie Mellon.
Useless trivia: I once broke the world pogo stick jumping record without knowing it.